BEIJING, China – The International Monetary Fund raised its economic growth forecast for China on Monday but warned that its financial system faces risks due to the rapid expansion of debt.

The IMF’s 0.3 percentage point increase to 7.5 per cent in its growth outlook for China may help reassure investors who worry the world’s second-largest economy might be slowing too abruptly.

The forecast is in line with the ruling Communist Party’s official growth target for the year and would be the strongest for any major economy. But it is well below the double-digit levels of the past decade and might raise the risk of politically dangerous job losses.

The IMF warned that China faces the twin risks of an unexpectedly sharp slowdown and “rising vulnerabilities” in its financial system. It said both could cause repercussions for the region.

It pointed to the rapid growth of credit from sources other than traditional banks. It said the assets of such lenders have grown to the equivalent of 25 per cent of the country’s annual gross domestic product.

“This represents an important source of systemic risks,” the IMF said.

Chinese regulators have tried to slow credit growth without causing the economy to stall. Total credit was 16.8 per cent greater in March than a year earlier.

The IMF’s warning echoed private sector economists who say the rapid increase in China’s debt levels is similar to that of other developing countries that have gone on to suffer financial crises.

China’s total government and private debt rose to 207 per cent of GDP in 2012, a 62 per cent increase over 2008, according to estimates by Nomura economists Zhiwei Zhang and Wendy Chen.

The IMF noted recent defaults in trust products, or packages of credit card and other debt sold by banks to investors, and heavy debts owed by some local governments that borrowed to pay for roads and other projects.

“There is likely to be continued news of credit problems,” the IMF said. “This could spark adverse financial market reaction both in China and globally.”

The report urged Beijing to make progress toward its goal of rebalancing the economy toward self-sustaining growth based on domestic consumption and away from reliance on investment.

Reforms promised by the government of President Xi Jinping are “far-reaching and have the potential to transform the economy,” the IMF said.

“There are some burgeoning signs that consumption is set to play a larger role in the economy, and efforts to cool down credit growth, raise the cost of capital and dampen investment growth should continue.”

China’s economic growth last year of 7.7 per cent tied 2012 for its lowest annual rate since 1999 and dipped to 7.4 per cent in the first quarter. Exports and manufacturing have weakened, raising questions about whether growth is slowing too sharply.

The ruling party has promised to make the state-dominated economy more efficient and productive by opening more industries to entrepreneurs who generate a majority of China’s new jobs and wealth.

Beijing has issued a steady series of small changes including simplifying new business registration and plans to create China’s first privately financed banks since the 1949 Communist revolution.

But it has yet to tackle what analysts say are the most urgent and important challenges of curbing the dominance of state companies and reforming a banking system that subsidizes them with cheap credit.

“The reforms could enhance welfare by boosting private consumption and making growth more sustainable, although the economy could initially slow down somewhat,” the IMF said.